France focus: Doing it the hard way

There is something to be said for slow economic growth. France’s GDP has lagged the pace of its northern European neighbours and a happy result of this, say local GPs, is that the entry multiples they have to pay – while still high enough to cause concern – are not as high as elsewhere in Europe.

“France is in a better state than the UK and Germany because of where we are in the cycle,” says Robert Daussun, chief executive officer of LBO France, a France-focused private equity firm with €3 billion under management across a range of market segments. 

“Multiples are on average nine times, compared to 10 in Germany and more than 11 in the US and UK; it is still a relatively attractive market. LPs can still capitalise on some multiple expansion.”

Daussun is part of a lively group of experts on French private equity gathered for Private Equity International’s annual roundtable in Paris in late April.

The question of high asset prices – and the resulting uphill struggle to generate high returns – has drawn a number of different reactions. One thought that echoes through everyone’s comments, however, is the need to focus on growth and implement the value creation methods that have become the calling card of good private equity owners.

“At the operational level, we are in a world of low interest rates, low oil price and low inflation,” says François Jerphagnon, chief investment officer of Ardian’s Expansion team, which focuses on companies in the French, German and Italian lower mid-market.

“This means everything is aligned for high leverage on fixed costs, which means one has to focus on growth deals. Focus on growth – organic and build-ups – and keep adding value throughout the ownership period and you can still make good returns.”

Gérard Pluvinet is the founding managing partner of 21 Centrale Partners, which invests in companies with enterprise values of between €50 million and €200 million. Like Jerphagnon, he is mindful of the need to focus on growth in today’s market. “It is a fact; low interest rates and an abundance of liquidity lead to high prices. You have to find good deals, create value and professionalise the companies you invest in.”

Pierre Jourdain, partner at Azulis Capital, adds that while his firm operates at the smaller end of the market, it too has to offer what he describes as a fair prices for “nice” companies. “We consider that even a small midcap company deserves a fair price when it has demonstrated resilience, with a strong management and a potential to become a performing platform through acquisitions. There is no bargain for such a company,” he says.

This, says Daussun, makes private equity a more interesting business than it once was. “Ten years ago, it was all about M&A. The talent was sourcing and executing deals at the right price. Now the price is the price and we have to put in the hours to create value.” But, despite the “can do” attitude of the general partners around the table, there is no doubt that pricing – and the supply-demand mismatch between the private capital awaiting deployment and high quality deal flow – is a concern to the limited partner community.

“It has been a great few years in terms of distributions,” says Billy Gilmore, head of primary funds, Europe, at Aberdeen Asset Management, referring to the abundance of cash returned to investors. “The problem is that all the cash has found its way back into the industry,” he says, adding that the problem is seriously exacerbated by the shadow capital – the co-investment allocations and private debt funds – looking to be put to work alongside all the private equity “dry powder”.

And while value creation in private equity “has moved on a lot in recent years”, adds Gilmore, he urges caution to those who think they can defy market conditions to generate stellar returns. “I still think the price you pay for an asset is an important component in the return you ultimately make. Paying a full price against a backdrop of anaemic growth means you may end up holding that business for a long time and the consequential damage in IRRs is of concern to LPs.”

It is clear that the GPs around the table are under no illusion that returns will come easily from investments made at this point of the market cycle. “We are in a low-growth environment and we still have an 8 percent hurdle rate,” notes Pluvinet to muted laughter around the table, “fortunately we also have the teams and the know-how to succeed”.

Where then to find the growth? The answer, most agree, is not so much breaking the mould, but doing what the private equity industry has so often done well in the past: taking local or national ‘cham-pions’ and scaling them to appeal to a wider group of buyers.

“Foreign buyers are looking for European champions,” says Ardian’s Jerphagnon, “So if you take a French company and turn it into a European one through organic or build-up activity, then your likelihood of finding a strategic buyer is much higher than with a purely French business.”

Those interested in buying French businesses are more and more often overseas trade buyers looking to develop a foothold in Europe, rather than global private equity firms, says Azulis’s Jourdain. From his firm’s segment in the market, Jourdain says he has seen an increasing interest from non-European strategic buyers – it recently sold some assets to a Thai company.

The experts around the table note that American strategic investors are actively looking at France-headquartered businesses. Are they seeing signs of the much-vaunted interest in prized European assets from Chinese buyers, either financial or strategic?

“Strategics from around the world – Chinese players seem to be more and more active – are interested in investing in Europe,” says LBO France’s Daussun. “This is a good time to be a French private equity investor looking for an exit.”

“We see some Chinese buyers in processes,” notes 21 Centrale’s Pluvinet, “but they take a long time to make decisions. While they have certainly done some deals in certain areas thus far they account for a small number of global exits.”


On the morning of our meeting in Paris, a subsidiary of Chinese insurer Ping An has announced the acquisition of a 3i Group portfolio company in the UK. Is this a sign that the burgeoning Chinese corporate appetite for European assets is turning into a genuinely viable exit route?

All around the table agree that there have been examples of Chinese potential suitors for portfolio companies, but that none of these had yet to materialise into viable bids. Jerphagnon notes that serious Chinese interest in French assets has been focused on very specific sectors, such as luxury goods, travel and tourism, and wine. They are already investing heavily in the dairy industry in Brittany, notes Jourdain.

While it has yet to happen in earnest, it will potentially happen one day. “They have started, they are looking,” says Pluvinet. “They are studying the way we operate and our mentality – which is totally different – and they can learn very quickly.”

The question is, says Aberdeen’s Gilmore, when writing your investment recommendations and discussion potential buyers for that business, do Chinese buyers enter your analysis as an exit route in four or five years’ time?

“They probably will more and more,” says Pluvinet.

The mention of international suitors for French businesses moves the discussion onto a somewhat tired concept: that of “French bashing” at the hands of the international business and finance community. It is a sentiment most neatly summarised in the hapless quote attributed to US President George W Bush: “The thing that’s wrong with the French is that they don’t have a word for entrepreneur.”

“When I tune into some of the international business media, I often see a lot of one-sided coverage,” says Pluvinet. “To watch it, you would think that French workers are never happy. In reality, on the ground in the mid-market, this is simply not the case.”

“Looking at the facts,” says Jourdain. “In France we have one of the best education systems in Europe. We have excellent infrastructure and efficient industry.”

“And we are world leaders in digital,” adds Pluvinet.

“And French MBA students aren’t flocking to private equity anymore; they are moving to start-ups,” chimes in Jerphagnon.

Ardian’s Jerphagnon notes that the negative perception – of an inflexible, heavily unionised workforce – does still exist among some would-be international strategic buyers. “Often there is a perception that you won’t have the flexibility to develop the business,” he explains.

To illustrate, he points to a recent example of an Ardian portfolio company that was due to be sold to a US trade buyer. The buyer had concerns that the workforce were not sufficiently invested in the company mission and, to test this, it organised a seminar on the topic to be held on the employees’ time at the weekend. If the workers turned up, it would send the right signal. And guess what: they did and the deal went ahead.

The private equity industry has its own version of “French bashing”, says Gilmore, which is equally misconceived. “From a private equity perspective, France has had a pretty bad press in the last few years,” he says, referring specifically to its reputation as a market crowded with a number of “me too” general partners relying on secondary and tertiary buyouts in a “closed, incestuous market”. This, says Gilmore, is a far cry from his experience as an investor.

“If you peel away the layers of the onion, you find that all the elements you want as a private equity investor are there. We have been investing in the French private equity market for 12 or 13 years and have generated good returns. There is a depth of choice and a lot of experience; in this regard I’d put it on a par with the UK,” he says.

Another popular topic on which to “bash” the French is that of the state’s involvement in the economy, through taxation, regulation and state-sponsored investment.

In terms of the former, this is no longer an issue, says Pluvinet. “All the fears we had when Hollande was elected… they have not materialised,” he says, referring to the threat of high taxes stifling growth and pushing wealth offshore.

Taxation has, in fact, been untouched for the last couple of years, adds Jourdain, “so we have some stability”. Notably, he says, the introduction of the ‘Competitiveness and Employment Tax Credit’ (CICE) in 2013 has had the desired effects of boosting investment and employment.


While the general business environment has proved conducive to the sort of corporate activity that private equity firms and their counterparts appreciate, the private equity industry has also benefited from an improved reputation as a whole.

Some of the credit for this should go to the Association Francaise des Investisseurs pour la Croissance (AFIC), the private equity industry trade body, says Jourdain. “The private equity association has done a great job at demonstrating how the industry creates jobs… we develop and create great companies, implement ESR policies, and now the politicians are starting to realise this.”

Jerphagnon agrees that “the PR situation is less tense and complicated”, something which is in part due to the work undertaken by AFIC and in part down to the industry “behaving in a way that is aligned with the general public’s expectations” (in a positive sense).

Daussun puts it more starkly: “The crisis of 2009 taught us that our business is critical. Otherwise it would have been destroyed.”

Gilmore adds that, yes AFIC has done its job in promoting the industry, but now it is up to another, more persuasive, group to speak up in defence of the industry: the limited partners, “the large insurance companies and pension funds that rely on the asset class to generate the necessary returns”.

Gilmore’s comments lead onto a pertinent point for French private equity: appetite among domestic LPs. The financial crisis brought in its wake a glut of new regulation for the insurance, pensions and alternative investment markets. French private equity had been built on investment from domestic banks and insurance companies.

When new regulation arrived, in the form of Solvency II and Basel III, which would in effect make it more expensive for this groups to hold “risky” assets like private equity fund interests – as the Volcker Rule did in the US for banks – it was feared that this would tear the heart out of French private equity. Did it? Au contraire, says Jerphagnon. “Even with a high cost of capital to insurers and pension funds, private equity is still an attractive asset class relative to what else is on offer.”

“The insurers are back,” agrees Jourdain. “But like many LPs around the world they have increased their ticket size from €15 million 10 years ago to €40 million now. However, some LPs are ready to increase their exposure in the funds from 10 percent to 20 percent.”

While regulation has not bitten as expected in the fundraising market, says Daussun, it has become a fact of life in the day-to-day operation of an institutional private equity firm. “We are now hea-vily regulated as an industry – complying with the likes of FATCA and AIFMD. LBO France is not a huge firm, but it now has two full time compliance officers.”

Likewise LPs are spending more time looking at governance and reporting.

“It is the sign of a maturing asset class,” says Gilmore.

As the experts around the table wrap up their thoughts, it is clear that there is much to sell French private equity: world class management, great innovation, effective infrastructure and genuine entrepreneurial spirit. George W Bush stands corrected. ?

“Five years ago, we would ask GPs if they have an ESG policy. Now we ask for demonstrable evidence,” says Billy Gilmore of Aberdeen Asset Management.

He is referring, of course, to environmental, social and governance considerations.
“Private equity has always been good at the ‘G’. Now it is about the ‘E’ and the ‘S’. It is on the agenda at every advisory committee meeting, making sure GPs are paying attention to the issues.”

This, says Gilmore, is an area of leadership for French private equity. “I would describe French general partners as early adopters; corporate governance has been taken seriously in France for a long time.” The ‘S’ part of acronym is a popular talking point with those around the table: specifically ensuring the economics of a deal are shared equitably among a portfolio company’s work force.

“Ten years ago,” says Robert Daussun of LBO France, “we had a deal that was good in every way other than the fact that the two company founders didn’t want to share any of the economics. This can no longer happen.”

Ardian’s François Jerphagnon describes the practice of sharing part of the capital gains Ardian realises on exit with the staff of those companies.

“It is important that the benefits of a sale are felt among a large number of people, rather than concentrated in the hands of a few.”


Before joining LBO France in 1993, Robert was a civil servant with the French finance ministry, where his last position was head of the Budget minister’s office. Robert holds a PhD in Classical Littérature and is an ENA graduate.


Billy leads primary funds coverage in Europe and is a member of the investment committee. He joined Aberdeen in 2014 following the acquisition of Scottish Widows Investment Partnership having previously worked for Murray Johnstone. He is a chartered accountant with a BA in accountancy and economics from the University of Strathclyde.


François joined Ardian in 2001 and is chief investment officer at Ardian Expansion. At Ardian, he led the investments in Iliad/Free, Sateco, SynerLAB, Altares, Arkadin, Cegos, Micropross and Bio7. He graduated from Paris Dauphine University and received his actuary diploma from the National School of Statistics and Business Administration (ENSAE).


Pierre is a founding and managing partner of Azulis Capital. Pierre joined the firm in 1992 with prior experience in food and agribusiness. While broadening his expertise to other sectors, he is still in charge of investments in the food industry. He is an engineer in agronomy (AgroParisTech) and forestry (ENGREF). He also holds an MBA from ESSEC.


Gérard created 21 Centrale Partners in 1998 with Alessandro Benetton. He had previously been managing director then chairman of Société Centrale Pour l’Industrie, which he joined in 1970. Gérard holds a masters degree in law and economics and is a graduate of the IEP Paris.